As oil prices continued to rise steadily on world markets during the early part of 2008, it became clear to many energy and economic experts around the world that supply and demand were not the only forces pushing prices higher. Market speculators who had no intent of accepting delivery of crude oil were buying and selling futures contracts to make quick profits as the price of oil continued to race upward. Market volatility exploded. During 1998, a barrel of oil traded within a $7 price range the entire year. A decade later, price swings of that magnitude were being seen in a single day. As long as another trader was willing to buy a contract at an even higher price than the original trader had purchased it, the bubble continued to inflate. While this phenomenon has occurred with different commodities and goods since nearly the beginning of markets, never before has a price bubble so deeply affected the pocket books of the American consumer.
On August 21, 2008, the Washington Post reported that the Commodity Futures Trading Commission (CFTC) has now learned that an astonishing 80 percent or more of oil contracts on the New York futures market are held by speculators. "Financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on the NYMEX, a far bigger share than had previously been reported by the agency." At one point in July, a single foreign energy firm held 11 percent of all regulated NYMEX oil futures contracts for the purpose of speculation.
At a hearing of the Select Committee on Energy Independence and Global Warming on May 22, 2008, the Bush Administration's top energy official, Energy Secretary Samuel Bodman, testified that he did not believe that speculation was playing any role in the run up in oil prices. When I asked whether rampant speculation was occurring in the oil futures market, Secretary Bodman responded, "No, I do not." Unfortunately for the American people, this misguided view led to the Bush Administration neglecting its responsibility to use the weapons that President Bush has at his disposal to affect the price of oil and oppose Democratic efforts to pop the speculative oil bubble.
Throughout the spring and summer, President Bush and Republicans in Congress thwarted attempt after attempt by Democrats to pop this speculative bubble and provide relief to consumers. Each time, Republicans sided with Big Oil over the American people. The resulting run up in oil prices is expected to drive Big Oil's profits to a record-breaking $160 billion in 2008.
On April 1, 2008, the price of oil was $100 per barrel. If the President had followed the call of Congressional Democrats and used the tools at his disposal back then--deploying the Strategic Petroleum Reserve and tightening oversight of oil markets--it is very likely much of this summer's pain at the pump could have been avoided. Instead, prices have since risen to as high as $147 per barrel and, according to my calculations, have resulted in additional costs for American consumers of $31 billion at the pump this summer.
Former Federal Reserve Chairman Alan Greenspan recently stated his view, that speculation was "importantly responsible" for the rapid increase in oil prices in late 2007 and early 2008. "Financial speculation did play a significant part in the rapid increase in oil prices," Greenspan said. The $31 billion Bush Big Oil bounce has contributed to the slowing of the American economy and put working families facing record prices at the pump in a desperate situation.
Democratic Legislative Action to Pop the Speculative Bubble
Since the beginning of April, Democratic leaders have repeatedly called for President Bush to take action to pop the speculative bubble in oil prices and help consumers. On April 9, 2008, as the price of oil stood at $110.89, I joined with Democratic Caucus Chairman Rahm Emanuel and Rep. Peter Welch in writing to the President. We urged him to immediately stop filling our nation's Strategic Petroleum Reserve (SPR) and also release oil from this government stockpile, stating, "These two actions, in combination, would provide a powerful signal to speculators and world oil markets that will help alleviate the current upward pressure on prices and help American families." However the Administration refused to take these actions, and other immediate relief efforts including:
1) Price Gouging:
The Democratic Congress has taken up numerous bills over the summer months in order to address the rampant oil speculation that has driven up prices. However, each of these legislative efforts has been blocked by President Bush and the Republican leadership in Congress.
On June 24, 2008, the House considered H.R. 6346, the Federal Price Gouging Prevention Act, which would have helped protect consumers from unfair price increases at the pump. However, the Bush Administration threatened to veto this important legislation to protect American consumers from being gouged by Big Oil. The White House stated "if H.R. 6346 or any similar price control bill were presented to the President, his senior advisors would recommend that he veto the bill." House Minority Leader John Boehner along with the majority of House Republicans, voted with the Bush Administration and Big Oil to block this legislation.
2) Deploying our Government Oil Stockpile:
On July 24, 2008, the House considered H.R. 6578, the Consumer Energy Supply Act of 2008. This legislation would have required the Administration to begin immediately releasing oil from the SPR onto the market over a six month period and then refill the stockpile at a later date. The effect would have been to put an end to the speculative feeding frenzy that was driving up oil prices.
Deploying oil from the SPR has driven down prices when it has been used in the past. In 1991, when President Bush's father deployed oil from the reserve, oil prices fell 33.4 percent in two days. In 2000, President Clinton conducted a time exchange of oil from the SPR and prices again immediately dropped by 18.7 percent. And in 2005, when President Bush himself released oil following Hurricane Katrina, prices fell 9.1 percent. That's an average drop in the price of oil of 19.2 percent - a similar impact at the time would have resulted in a nearly $24 reduction in the price of oil.
The Bush Administration actively worked to oppose this legislation and despite the support of every Democrat, House Republicans stood together to block the passage of this legislation that could have immediately lowered oil and gas prices.
3) Cracking Down on Speculation in the Oil Markets:
On July 30, 2008, the House considered H.R. 6604, the Commodity Markets Transparency Act of 2008, which would have directed the Commodities Futures Trading Commission (CFTC) to use their authorities more aggressively to police the energy commodities market for manipulation, fraud and excessive speculation. This legislation would have been an important step in putting a federal cop back on the beat to crack down on the market speculation that was driving escalating oil prices.
The Bush Administration again chose to stand with the speculators and Big Oil rather than the American people by threatening to veto this important legislation, stating "the Administration is strongly opposed to H.R. 6604, which offers poorly targeted short-term measures that do nothing to address the fundamentals of supply and demand that bear the primary responsibility for current high energy prices" Republican Leader Boehner and the majority of House Republicans again followed suit by voting down this bill.
A New Direction
Since the Democrats took control of Congress we have pushed for a new direction on energy policy for America, successfully passing the first increase in fuel economy standards in over 30 years. But Big Oil and their Republican allies have dug in, using the same tactics of distraction and misinformation to keep consumers paying over $4 for a gallon of gas. Now that the CFTC report confirms Democrats suspicion that financial players such as hedge funds and foreign traders--and not oil consumers--were driving the price of oil higher and higher, Republicans should drop the blockade, and pass legislation to fight speculators.